Statutory Merger

[Guest nbs]

Has anyone out there had experience with a statutory merger of companies? I have 3 companies (unrelated) that are forming a new company on 8/1/02. All have existing plans that will be terminated on 7/31 prior to the merger. It is my understanding that terminating the plans prior to the merger will eliminate any successor plan issues (one was a 401(k)).

An attorney is saying that because it is a statutory merger, the new company is just a continuation of the old ones and not a new ER. Which (according to him) means we can't set up a new SH 401(k) plan for the new entity because of successor plan problems nor distribute assets of the k plan (no actual separation from service).

My take: the old companies will no longer exist and all employees will be working for the new company that is formed. Plus we are terminating the other plans prior to the merger. Seems to me that I don't have a successor plan problem.

What do you think?

[JanetM]

Why don"t you just make the new company the sponsor of the old plans - and then freeze them. Start the new plan for the combined new company.

You can always merge the existing plans into the new plan.

[KJohnson]

This "statutory merger" issue troubled me as well.

If the buyer and the "target" remain separate corporations (although in a parent-sub or brother-sister controlled group) then there is no problem because the status of the controlled group is determined on the date of termination (i.e. prior to the transaction when there is no controlled group).

However, in a statutory merger situation the new entity, from a legal standpoint, is the same entity as its predecessors.

Look at this Q&A:

http://www.benefitslink.com/benefits-bin/q...a_distributions

My advice has always been 1) merge the plans, or 2)terminate and seek a determination letter flagging the successor plan issue in your cover letter or 3) restucture as an asset deal.

I have had success with No. 2 especially when the companies are statutorily merged into a newly formed entity with a separate EIN and corporate existence from any of the"predecessor" companies. The merger agreement usually recites that the predecessor companies "cease to exist" on the date of the merger.

[Guest nbs]

Thanks for the replies.

All owners involved do not want "baggage" from the old plans. That's why we're terminating the old plans and not merging the plans into the new one, etc. Plus they want to be able to set up a Safe Harbor 401(k) plan and from what I have found, you can't do that since one of the old companies had a 401(k) plan.

KJohnson - Explain what "flagging the successor plan" in the determination request would mean for me, please. Also, if the merger agreement states that the predecessor companies no longer exist, will that eliminate the successor plan issue even though the new co. is technically a continuation of the old?

[KJohnson]

In the request for a determination letter I simply give the facts and state that you are requesting a determination that the termination of the plans, distribution of assets and the establishment of a plan in the newly formed entity does not violate the successor plan rule.

Is reciting that the old enities ceased to exist sufficent in light of the legal consequences of a staturoy merger under 368? I don't know, but I have gotten favorable determination letters based on these facts.

Also, this issue has arisen in the 415 context (i.e. do you get a new 415 limit for the "new plan") and the IRS, at least in a PLR, has indicated that you do "start over"

In PLR ,9541041, six P.A's merged into a "new corpororation" The IRS stated that if the prior corporations "ceased to exist" because of the merger then the plans of the prior employers and the plan of the "new" employer would not need to be aggregated for 415. IRS reasoned that corporations must exist at the same time to be under common control. Since "old employer" ceased to exist at the time "new employer" came into existence--no common control and no Section 415 aggregation.

Of course this is just a PLR.